The Importance of a Thorough 1003- Part Two of Three Part Series

About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: blog@mortgageprocessor.org.

It all starts with the loan application and quite frankly, if the 1003 isn’t thorough and accurate from the get-go, it can stop your file dead in its tracks once it hits underwriting. From an underwriting standpoint, nothing is as important as a complete and accurate loan application because the 1003 is the window to the file; it’s the “book” that tells the story.

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Last week, I outlined some of the most common errors and oversights on page one of the 1003 from an underwriter’s perspective. This week, we’re taking a look at the most common errors and oversights on page two of the 1003.

Most Common Errors- 1003 Page Two

• Gross Monthly Income: The most important advice given from underwriters about the income section of the 1003 is to stress the importance of categorizing the income properly. When income isn’t entered in the proper field or under the proper dropdown box selection, the AUS findings cannot be relied upon to be accurate. You may not receive the correct documentation requirements when income is entered under incorrect categories.

For example, do not include overtime, bonus or commission earnings in with the base income figure. When needed for qualifying, overtime and bonus income needs to be separated out from base earnings, even it if means obtaining a full VOE from the employer. Each income category has its own requirement in terms of how long it must be received in order to use, whether it needs to be averaged over 24 months or 12 months, dependent upon the loan type. When all lumped together, AUS does not read the various income types and will not provide accurate messaging to assist with underwriting and documenting the various earnings types properly.

• Dividend/Interest Income: Check to make sure your lender allows the use of dividend and interest income for qualifying and if so, what the specific requirements are. Many lenders have added overlay requirements for use of this type of income. Generally when used, the figure entered will consist of a 12 or 24 month average from Schedule B of tax returns.

• Net rental income: Do not enter any figures in this field manually. This field fills in from other sections of the 1003- either from the gross rent and occupancy rate sections on page one of the 1003 when investment property is being purchases or from the REO section on page three of the 1003 for existing investment REO.

• “Other” Income: These sections require specific selection, usually from a dropdown box, or entry of the income category that most closely describes the type of qualifying income: Child Support, SSI/Disability, Pension, Military Income types as described directly from the Military Paystub (Leave & Earnings Statement)

• Unreimbursed expenses- Unreimbursed expenses should be averaged and deducted from qualifying income.

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• Monthly Housing Expense-Present: This field is often left blank even when page one of the 1003 indicates the borrower currently rents. It’s important this field be filled in. Also, when a borrower owns a property free and clear, it’s important that the monthly real estate taxes, insurance and association fees be entered and indicated in this section. It’s very important in some cases that underwriting have the ability to compare the current housing expense to the proposed housing expense, particularly when marginal credit is present and most importantly when manually underwriting the loan file. Often, it’s the comparison of present to proposed housing expense that sets the tone for how likely high risk files are to be approved.

• Monthly Housing Expense-Proposed: The principal and interest payment likely calculates itself but pay particular attention to the other field details that may need to be entered and/or double-checked for accuracy. If repayment is required on a source of secondary financing or a current lien is re-subordinating, it needs to be entered and considered under the “Other Financing” field for qualifying. The ‘hazard insurance” field should include the estimated or actual annual cost of hazard insurance or HO-6 condominium insurance divided down by 12 months for the subject property. The “Real Estate Taxes” field must include the estimated or actual annual cost of real estate property taxes divided down by 12 months for the subject property. Monthly mortgage insurance must be entered if required for a conventional loan that exceeds 80% loan-to-value, for an FHA loan that requires annual mortgage insurance and for a USDA loan that requires annual guarantee. Lastly, don’t forget to include a monthly amount to account for association dues if the property is subject to homeowners association fees. The total proposed housing payment for the subject property should include ALL costs calculated down to a monthly amortization so that a true monthly cost is established for repayment on the proposed loan.

• Assets-Cash Deposit: If earnest money amount is entered in this field, it’s important to establish that is not “double counted” in other account balances in other asset sections that follow and that the amount is not double-counted by counting as an asset on page two as well as a credit on page three.

• Checking and Savings Accounts: Enter the full details for each account under this section of page two of the 1003 including name of the financial institution, account number, and be sure to identify the account type by choosing the correct category for account type. Also, be sure to properly identify which borrower each account belongs to or jointly held, if applicable.

• Gift Funds: Gift funds must be properly identified and must indicate whether are already on deposit or have yet to be deposited. If the gift has already been deposited, deduct the amount of the gift from the verified total assets and classify the gift amount as ‘gifts total’ rather than lumping it under checking/savings or other liquid assets. Properly naming the gift will allow AUS to offer the appropriate messaging and documentation requirements.

• Stocks and Bonds: Enter name and account number for each. If bonds are marketable, enter 100% of the value if using for closing funds or enter 70% of the value for reserves. Mutual Funds may also be entered in this section under same terms as stocks and bonds.

• Life Insurance: Enter the face amount of the policy and the cash value for “market value” of the policy. Note, when borrowing from life insurance policy, repayment does not have to be considered in qualifying.

• Retirement funds: Enter 60% of the NET vested balance minus any outstanding loans as “vested interest in retirement fund.”

• Net worth of Business Owned: This field is difficult to fill in with certainty. I recommend leave it blank.

• Automobiles Owned: Enter makes, models and estimated value for automobiles owned. Autos listed here should be reconciled to account for auto loans reflected on credit report.

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• “Other Assets” are fields that can be used for “overflow” of various types of assets and personal property such as “notes receivable”,

Next week we’ll take a look at proper data entry of debts and liabilities on page two of the 1003 as well as proper entry of real estate owned details of transaction.

Until then, Happy Thanksgiving to all! Wishing you safe travels and a wonderful holiday celebration with family and friends!

SOURCE: Published by NAMP® Publishing Group, a division of the National Association of Mortgage Processors (NAMP) (http://www.mortgageprocessor.org)